Coke looks for energy-drink boost from Monster

MikeEsterl

In a risky bid to jolt sagging sales, Coca-Cola Co. is paying $2.15 billion to acquire a 16.7% stake in energy-drink maker Monster Beverage Corp. as part of an asset swap.

Coke badly needs some big new ideas. Global soda sales growth is slowing for a third straight year and the company missed its overall targets last year as a result. Diet Coke is falling off a cliff.

Energy drink sales, by contrast, have been a bright spot in the beverage market, though sales have been slowing after several years of double-digit growth. Global energy-drink sales increased just 6.8% last year in dollar terms, down from 11% in 2012 and 20% in 2011, according to Euromonitor.

Monster is the country's No. 2 energy-drink maker, second only to the maker of Red Bull. Revenue at Monster rose 9% last year to $2.2 billion. As one of the first energy drinks, its edgy image is very different from wholesome, All-American image that Coke has fostered. Its cans feature a neon green M that looks created by a claw slashing through the darkness. And the caffeine-fueled category faces rising regulatory scrutiny in the U.S. and abroad.

Analysts had long considered Monster a potential takeover target and had named Coke as a leading candidate to buy the Corona, Calif., company. In April, 2012, The Wall Street Journal reported that Coke had been in talks to acquire Monster but decided to walk away after a 20% jump in Monster's share price. Back then, Monster shares traded at $65 a share and sales of energy drinks were rapidly rising. At the time, a Coke spokesman denied the accounts.

Coke plans to expand Monster's distribution footprint "in a major and meaningful way," said Muhtar Kent, Coke's chief executive, on a conference call Thursday. Coke already distributes Monster in about half the U.S., with distributors affiliated with brewer Anheuser-Busch InBev NV controlling most of the remainder.

A standstill agreement prevents Coke from increasing its stake in Monster beyond 25% for four years, unless the boards of both companies agree to waive it, added executives at both companies.

Mr. Kent declined to comment Thursday on whether Coke had discussed buying all of Monster or would pursue an outright acquisition at a later date. He added that Coke is pursuing "a capital disciplined approach" to acquisitions.

Rodney Sacks, Monster's CEO, wouldn't rule out selling a bigger stake to Coke at a later date. "We'll see where that brings us in the future," Mr. Sacks said on the conference call.

Coke's move could put pressure on chief beverage rival PepsiCo Inc. to revisit its own energy drink strategy. PepsiCo in the U.S. distributes Rockstar Inc.'s namesake energy drink, the distant No. 3 brand in the U.S.

As part of the asset swap, the Atlanta-based company will transfer to Monster the ownership of Coke's energy-drinks business--which includes brands like NOS, Full Throttle, Burn, Mother, Play and Power Play, and Relentless. Meanwhile, Monster will transfer its non-energy-drinks business, including Hansen's Natural Sodas, Peace Tea, Hubert's Lemonade and Hansen's Juice Products, to Coca-Cola.

The companies hope to close the deal in late 2014 or early 2015.

Energy drinks face significant regulatory headwinds amid concerns about their potential health effects. The U.S. Food and Drug Administration is investigating more than a dozen deaths allegedly tied to energy drinks, including some made by Monster. New York State Attorney General Eric Schneiderman launched a probe in 2012 into the marketing tactics of several energy drink makers, including Monster.

Monster and other energy-drink makers say their products are safe and haven't caused any deaths. Monster says its namesake carbonated drink, ounce by ounce, has roughly half the caffeine of a Starbucks coffee. In addition to caffeine, energy drinks typically include other ingredients such as taurine and ginseng that the companies market as providing additional energy kicks.

Monster had a 35.1% share of the $9 billion U.S. energy-drink market in 2013, second only to the 42.9% share held by Austria's Red Bull GmbH, according to the data service Euromonitor. It had a 14% share of the $27.5 billion global energy drinks market.

Coke is scrambling to boost revenue amid slackening global sales of soda, which represents more than 70% of the company's global volume. Coke's soda volumes are slowing for a third straight year and fell globally in the first quarter for the first time since 1999 as consumers in the U.S. and abroad increasingly grabbed bottled water, juices and caffeinated drinks.

In another move out of its comfort zone, Coke agreed in February to pay $1.25 billion for a 10% stake in fast-growing Keurig Green Mountain Inc., maker of Keurig single-serve coffee machines. In May it said it would increase its stake in Keurig to 16% through additional stock-market purchases.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.